Thursday, July 16, 2009

The Great Vampire Squid Feeding on Society's Cash

The first thing you need to know about Goldman Sachs is that it's everywhere. The world's most powerful investment bank is a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money. In fact, the history of the recent financial crisis, which doubles as a history of the rapid decline and fall of the suddenly swindled dry American empire, reads like a Who's Who of Goldman Sachs graduates.

The bank's unprecedented reach and power have enabled it to turn all of America into a giant pumpanddump scam, manipulating whole economic sectors for years at a time, moving the dice game as this or that market collapses, and all the time gorging itself on the unseen costs that are breaking families everywhere — high gas prices, rising consumercredit rates, halfeaten pension funds, mass layoffs, future taxes to pay off bailouts. All that money that you're losing, it's going somewhere, and in both a literal and a figurative sense, Goldman Sachs is where it's going: The bank is a huge, highly sophisticated engine for converting the useful, deployed wealth of society into the least useful, most wasteful and insoluble substance on Earth — pure profit for rich individuals.

It's a fascinating look into a, if not the, major player in the lead up to our current financial debacle. Michael Lewis traces the root cause back even further. In an article called "The End" he takes us through the mortgage meltdown. But deep into the article, right at the end of it he talks about his lunch with John Gutfreund, the CEO of Salomon Brothers who turned it from a private partnership into Wall Street’s first public corporation. By doing this Gutfreund:

...and the other partners not only made a quick killing; they transferred the ultimate financial risk from themselves to their shareholders. It didn’t, in the end, make a great deal of sense for the shareholders. (A share of Salomon Brothers purchased when I arrived on the trading floor, in 1986, at a then market price of $42, would be worth 2.26 shares of Citigroup today—market value: $27.) But it made fantastic sense for the investment bankers.

From that moment, though, the Wall Street firm became a black box. The shareholders who financed the risks had no real understanding of what the risk takers were doing, and as the risk-taking grew ever more complex, their understanding diminished. The moment Salomon Brothers demonstrated the potential gains to be had by the investment bank as public corporation, the psychological foundations of Wall Street shifted from trust to blind faith.

No investment bank owned by its employees would have levered itself 35 to 1 or bought and held $50 billion in mezzanine C.D.O.’s. I doubt any partnership would have sought to game the rating agencies or leap into bed with loan sharks or even allow mezzanine C.D.O.’s to be sold to its customers. The hoped-for short-term gain would not have justified the long-term hit.

...[Gutfreund] agreed that the main effect of turning a partnership into a corporation was to transfer the financial risk to the shareholders. “When things go wrong, it’s their problem,” he said—and obviously not theirs alone. When a Wall Street investment bank screwed up badly enough, its risks became the problem of the U.S. government. “It’s laissez-faire until you get in deep shit,” he said, with a half chuckle. He was out of the game.

And the taxpayers were left, paying for it.

If you're not ready to read the entire article, Matt Taibbi did an excellent series of interviews with Sam Seder which covers the basics very well.

Here is what I mean. Goldman Sachs knows that they are too big too fail. And they already know what the government does when a financial company is too big to fail. They bail them out -- no matter what.

What if Goldman took too many risks in making the absurd amount of money they're making now (while we're told that the banks don't have any money to lend)? What if they crashed right now? What do you think would happen?

Everyone in the world knows that we would bail them out. The idea that Tim Geithner would let Goldman go under is so laughable that it makes me sick. Does anyone trust that guy's impartiality (other than Obama)? Does anyone believe there is even a 1% chance that Geithner and Summers would let Goldman go down?

So, if you knew that no matter what level risk you took the government would always come riding to the rescue -- and that more risk equals more money in the short term -- wouldn't you take more risk? Of course you would.